Farm Futures, IL
12-28-06
U.S. Hog Inventory Creeps Higher
Market sees pressure on future profits even as 2007 prices remain at 2006
levels.
John Otte
Producers told USDA that they had 1% more all hogs and pigs on Dec. 1 than a
year ago. The breeding herd was up 1% from Dec. 1, 2005, but down 1% from
Sept. 1, 2006.
The September-November 2006 farrowings and December 2006 -February 2007
and March-May farrowing intentions ended up in the top half of trade
expectations before the report.
"Still, the quarterly inventory numbers appear to be well anticipated with most
categories coming in near trade expectations," says John Harrington, DTN
livestock analyst.
Hogs on a good run. John Lawrence, Iowa State University economist
calculates November was the 34th consecutive month that the average Iowa
farrow-to-finish hog producer made money. That's the longest stretch of profits
since ISU economist Gene Futrell began the data series in the 1960s.
"One reason for continuing profitability is producers are restraining expansion,"
points out Dan Bluntzer, Frontier Risk Management, Robston, Tex. "Historically
solid profits have enticed producers to expand at a 5% to 8% annual pace."
Outside forces are impacting U.S. pork production. "Canada's strong dollar and
packing and processing issues are bringing liquidation in Canada," says Bluntzer.
"Higher corn prices are impacting beef and poultry here. The beef industry will try
to hold cattle outside of feedlots as long as possible. That could create a beef
supply hole next spring. That's all constructive for U.S. pork."
Price prospects. "History says pork producers need to pile up red ink before
they'll cut production," notes Ron Plain, University of Missouri economist. "But
the 2% uptick in December-February farrowing plans followed by a half percent
rise in March-May farrowing intentions suggests hog producers are slowing
production growth."
However, slower growth may not prevent red ink. Looking into 2007, prices Plain
projects on a live equivalent basis are:
* First quarter $44 to $47.
* Second quarter $47 to $50.
* Third quarter $44 to $47.
* Fourth quarter, $40 to $43.
"We're currently projecting a 2007 annual average in the $44 to $47 area," says
Plain. "Those prices are near 2006 levels. Unfortunately, with higher feed costs
we see breakevens near $50. That says producers will face red ink in 2007."
ICE raid impacts. The Dec. 12 Immigration and Customs Enforcement raids at
Swift beef and pork packing plants sent shockwaves reverberating through the
meat complex. "Hog slaughter dropped about 20,000 head that day below what it
would have been," says Plain. "But the impacts were short-lived. Packers made
up for most of the lost production with Saturday Dec. 16 slaughter."
While the raids did not appear to be as disruptive as first thought, uncertainty lies
ahead on when ICE may strike again.
"It's one thing to hold a knife on the kill floor," notes John Nalivka, Sterling
Marketing, Vale, Oregon. "It's another to be running a knife on the fabrication
floor. Taking more highly skilled people off the production line would have a
longer impact because of the time needed to train people to get up to speed."
Consumer price trends. High corn prices trim livestock production which boosts
hog and cattle prices. Higher livestock prices beget higher consumer meat
prices.
Nalivka does not anticipate any tightening of meat supplies and higher consumer
meat prices in the immediate term. "If meat supplies do tighten it will be because
producers market at lighter weights due to higher feed costs," he says. "If any
impact comes on consumers it will be late in 2007 and into 2008."